Choose Businesses, Not Stocks
Choose Businesses, Not Stocks
The Extraordinary Success Story of Warren Buffett and Berkshire Hathaway
Warren Buffett, the chairman of Berkshire Hathaway, is undoubtedly the most successful investor of our time. His investing prowess has turned him into a legendary figure, with his carefully chosen investments consistently outperforming the market. But beyond his financial achievements, there’s a fascinating story behind Warren Buffett and his company, Berkshire Hathaway.
The Early Days
Buffett’s journey began in 1965 when he acquired Berkshire Hathaway, which was initially just a doomed New England textile operation. Realizing the declining prospects of the textile industry, Buffett made a bold move and switched Berkshire’s focus to insurance. He purchased National Indemnity, a company that he still owns today and has been instrumental in Berkshire’s success.
The Berkshire Hathaway Portfolio
Today, Berkshire Hathaway’s portfolio consists of three major kinds of investments:
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Cash Reserves: Berkshire’s war chest currently stands at an astonishing $104 billion. This significant cash position gives Berkshire the flexibility to take advantage of investment opportunities as they arise.
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Operating Companies: Berkshire operates a diverse range of companies, from the iconic GEICO to BNSF Railway and See’s Candies. These wholly-owned subsidiaries contribute to Berkshire’s overall growth and success.
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Publicly Traded Stocks: Berkshire holds shares in 46 different companies. While the portfolio is diversified across various sectors, a few stocks dominate its value – Apple, Bank of America, Coca-Cola, American Express, and Chevron. Despite this concentration, Buffett remains unfazed, adhering to Mae West’s famous quote: “Too much of a good thing can be wonderful!”.
Think Like a Partner
Buffett’s investment philosophy is rooted in partnering with businesses that have long-lasting favorable economic characteristics and trustworthy managers. He doesn’t view investing as merely purchasing stocks but rather becoming a silent partner in a business. This approach has often proven highly profitable for Buffett and his long-time partner, Charlie Munger.
Buffett compares investing in publicly traded businesses to buying pieces of them at wonderful prices. He describes the stock market as a manic-depressive character named Mr. Market, who sometimes sets stock prices at absurd heights and other times sells at absurd lows. Buffett takes advantage of the latter instances to buy businesses that generate consistent cash flow.
Buffett’s stake in Coca-Cola exemplifies his investment strategy. Between 1987 and 1994, he invested $1.3 billion, and by 2022, the value of those shares had grown to $24.1 billion – an 18-fold increase. Buffett emphasizes that over time, a few winners can have a significant impact on your portfolio, making the weeds of underperforming investments wither away in insignificance.
The Wisdom of Patience
Buffett firmly adheres to Benjamin Graham’s wisdom that the stock market is a voting machine in the short term but a weighing machine in the long term. He espouses the value of patience and advises investors to look beyond the short-term market fluctuations.
While Buffett and Munger are in their nineties, they exemplify the power of having a long attention span and the ability to concentrate on one thing for a long time. They have concentrated on Berkshire Hathaway throughout their careers, and their handpicked successors are expected to carry on this tradition.
For those looking to mimic Berkshire’s successful portfolio, several stocks stand out as attractive options. Companies like Verisign, Moody’s, and Occidental Petroleum, of which Berkshire owns 25%, are among the top choices.
Alternatively, investors can purchase shares of Berkshire Hathaway itself. The Class A shares, which have never split, have a price that exceeds half a million dollars per share. However, the Class B shares offer a more accessible entry point.
A Promising Future
While Berkshire Hathaway’s growth rate has slowed down compared to its earlier years, with an annualized gain of 11.6% over the past decade, there’s no doubt that Buffett’s investment strategies continue to hold promise. Some skeptics question if Berkshire’s size will hinder its ability to outperform the market, but the track record of Buffett, Munger, and their successors provides confidence in their ability to succeed.
In conclusion, Warren Buffett’s journey from a struggling textile operation to the helm of one of the largest and most successful conglomerates is a testament to his wisdom, discipline, and long-term investment approach. His partnership-like mentality, patience, and ability to identify winners have made him an unparalleled force in the investing world. Whether you choose to follow their stock picks or invest directly in Berkshire Hathaway, Buffett’s legacy and the company’s continued success make it a compelling choice for any investor.
Note: This article originally appeared in ANBLE’s Personal Finance Magazine. For more insightful articles and advice, subscribe to ANBLE’s Personal Finance Magazine here.
